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Warren Buffett: Lessons on Investing

Warren Buffett, the octogenarian billionaire investor, has been a very generous man when it comes to sharing the wisdom he has accumulated over the years.

One medium he uses to share his thoughts is his annual Berkshire Hathaway shareholder letters. Having led Berkshire since 1965 and helped grow its book value per share (an important gauge for the real value of the company) by an astonishing compound annual rate of 19.4% (that works out to a 751,113% total increase!), you can be sure of finding plenty of worthwhile lessons when going through Buffett’s letters. You can find them here. (Go on – it’d be great!)

Beyond the letters, Buffett has also given lectures and speeches every now and then. I recently re-read a transcript of an old 1991 lecture that Buffett had given to the Notre Dame Faculty. Here are some great words from Buffett about investing, along with my thoughts.

On a business’s competitive advantage:

“She started this company in 1937 with $500. She was boycotted by most of the suppliers, the main carpet companies in town. They took her into court on violation of fair trade laws. When she got before the judge, Judge Chase, she said “Judge, I paid $3 a yard for this. Brandeis (a carpet store) paid $3 too. They sell it for $6.99. I sell it for $3.99. Tell me how much you want me to rob people. If you tell me to rob them $1 a yard, I’ll charge them $4.99.”

The newspaper picks up all this and the judge comes in and buys $1,400 worth of carpet. She beat them in court four times and every time she killed them.

This company is now the largest home furnishings store, by a factor of 2 to 1, over any home furnishings store in the United States.”

The lady Buffett’s talking about is the late Rose Blumkin, who was affectionately known as Mrs. B. At times, a company’s competitive advantage in the market can be something as simple as being fanatical about providing the lowest costs to your customer.

American warehouse retailer Costco has followed a roughly similar model. You may be surprised to know that Costco, even as retailer, does not earn much of a profit at all from the actual sale of products from its stores – it does not mark up prices of any of its products by more than 15% from cost. Instead, the company earns its keep mostly from membership fees (only members are allowed into Costco’s retail outlets).

Costco’s insistence on providing low costs for its customers helps it earn trust from the public, keep its members happy, and grow its membership count (Costco’s members have grown from 31 million in 2009 to 42 million in 2014).

More importantly, it has also made Costco into a phenomenal market-beating stock. Over the past 10 and 20 years, Costco’s shares have generated capital gains of 231% and 1,668%, respectively, according to S&P Capital IQ; for the same time periods, the S&P 500 (the US market benchmark) has climbed by only 70% and 246%.

On finding great business leaders:

“These people are rich, and we have to figure out if they’re the kind of people to keep working after they’ve sold out. We have to decide if they’re working because they love the business, or because they love money.

And, if they love money, they’re not of any use to us because I can’t give them enough money after they’ve got all the money [from selling us] their business. They’ve got to love the business. I would say that if we do anything very well at Berkshire, it’s spotting the kind of people that, after they are very rich, will work even harder.”

Finding the right jockey for a business can start with spotting business people with a real passion for what they’re doing. While individual investors like you and I may not always get the chance to interact with management teams at companies, there are still useful resources out there that can help us get a feel for what drives a company’s leader.

A January 2015 profile of Neo Kah Kiat by the Straits Times is a nice example. Neo’s the founder, chairman, and chief executive of events caterer Neo Group Ltd (SGX: 5UJ), which listed only in July 2012. In the Straits Times piece, Neo was quoted as saying:

“I started out from the kitchen. I’m a food man, so I know everything about my food – I can tell you what type of fish is nice, where it is from…

…The kitchen is a passion. You must love it. Before, I would do R&D (research and development) on the ground, but now I supervise and do more planning, strategy.”

The snippet above can, in my opinion, give one a feel for Neo’s passion for food – that can be important given that his company’s in the business of preparing great catering meals. The article also quoted Neo as saying that he initially harboured thoughts of retiring at 40 (he’s now 45). But when advised by his neighbour that 40’s too young an age to pack up the bags, Neo decided to soldier on with the business.

Prior to Neo Group’s listing, Neo was probably wealthy enough to have led the life he wanted given that he could have retired earlier. But he eventually chose to stay on. Neo Group’s business has grown steadily since its listing. Revenue has nearly doubled from S$38.5 million in the year ended 31 January 2012 to S$74.3 million over the last 12 months; meanwhile, profit has stepped up by nearly a quarter from S$5.4 million to S$6.7 million over the same period.

With its business growth, Neo Group has also been a market-beating stock. From their listing price of S$0.30, Neo Group’s shares have more than doubled to S$0.745 today, significantly outpacing Singapore’s market barometer, Straits Times Index (SGX: ^STI), which has remained essentially flat over the same timeframe.

There are of course other important attributes when it comes to great business leaders, but finding those that love what they’re doing can be a good starting point.

That’s all I have. Here’re the links for Buffett’s shareholder letters and 1991 lecture again. Do check them out. It’d be well worth your time.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway and Neo Group.